Aug 18, 2010, 07.23 PM IST | Source: CNBC-TV18

Superpower: Can India make up lost ground on China?

Is India ready for superpower status? Or are we irretrievably behind in the game of catch-up with China? What are our key strengths and weaknesses, and what unique things do we have to contribute to the global community in the 21st century?

Superpower: Can India make up lost ground on China?

Is India ready for superpower status? Or are we irretrievably behind in the game of catch-up with China? What are our key strengths and weaknesses, and what unique things do we have to contribute to the global community in the 21st century?

Network18 Founder and Editor Raghav Bahl answers these questions in his book 'Superpower?' The Amazing Race Between Chinas Hare and India's Tortoise.

Superpower? published by Penguin Books India, is already being called as one of the most definitive books on the subject.

In the race to superpower status, who is likely to breast the tape - Chinas hare or Indias tortoise? Chinas spectacular sweep, compared to Indias relatively mild rise, could tempt an easy answer. But history unfolds over time.

Bahl argues that the winner of the race with the biggest stakes ever might not be determined by who is investing more and growing faster today, but by something slightly more intangible: who has superior innovation and more entrepreneurial savvy and is grappling with and expanding in the most intensely competitive conditions. And, at the end, it might come down to just one deciding factor: can India fix its governance before China repairs its politics?

Speaking on the occasion of the book's launch, Bahl said, "I always had this niggling little doubt whether I had the resilience and the gumption to actually sit down and work on a 200-250 page book. So I said while this is as good a time I need to try it out and let me go and take this challenge for myself."

He offers solutions in the book when he talks about a new escape velocity model of capital investing. He said India must learn to take risks as the Chinese state has done. "We are just 10 years behind China, which we were ahead of 20 years ago. If we put the required amount of policy energy and risks, I have no reason to believe that this gap is unbridgeable. We have constraints but there are opportunities as well," he added.

The hindi version of the book was unveiled by union minister for Road Transport & Highways Kamal Nath. Also present on the occasion were Chairman of the Unique Identification Authority of India or UIDAI, Nandan Nilekani; Bimal Jalan, Former Governor, RBI; M Damodaran, Former Chairman, SEBI, and Shekhar Gupta, Editor-in-Chief, Indian Express.

Excerpts from Raghav Bahl's opening remarks and the panel discussion that followed.

Bahl: The crisis was beginning to ebb for the world. In India you could say with much confidence that it had virtually ended. And in our own little world of Network18, we were quite clear as well that we had negotiated the worst of the crisis and had managed to come out of it fully intact and strong.

So I knew that if anything I would have some mind space which had been completely consumed in the previous years by the crisis to turn to something that I had spent the first 10 years of my professional life doing, which was mainstream journalism.

My first option of course was to launch another television show. But then something inside my told me that perhaps the time had come to try something entirely untested, entirely new for me and I'd always had this niggling little doubt whether I had the resilience and the gumption to actually sit down and work on a 200-250 page book.

So I said while this is as good a time I need to try it out because while the crisis was ebbing it was also clear that it would take about a year. So there was going to be a very long tail, there was going to be a very long wake. And in that long wake you wouldnt be allowed to get too adventurous in business or entrepreneurial terms. So it was fairly clear that you would have some time and mind space in that one year. So I said let me go and take this challenge for myself.

When looking for themes to write on, one story which has fascinated me both in my capacity as an entrepreneur and as a business journalist was absolutely the inexorable rise of China.

Ill take you back just 32 years, just 32 and that number is important because in 1978 when Deng Xiaoping started his economic reform programme in China, a fact that I think very few people today remember is that the Indian economy was larger than China. Indias GDP was bigger than China in 1978, and I am talking just 32 years ago.

And even more critically, Chinas economic institutions had virtually been decimated through the Cultural Revolution. They virtually did not have a central bank, they did not have a stock market, their universities had been very largely emptied out. They did not have a judiciary worth the name, they had virtually annihilated the entire lawyer community in that country.

So it was in such a weak state economically speaking, institutionally speaking that China was in 1978. As opposed to that, India was not just a bigger GDP, our institutions of economic governance were actually maturing, evolving in a very throbbing and vibrant democracy and were acquiring a pedigree which was quite similar to what existed in the other developed economies of the world.

So if anyone was a betting man in 1978 and he was asked to wager that which economy do you think would win this race? I think 100:1 odds would have been India because there really was a hopeless case for China.

One more marker needs to be mentioned, 1990, just 20 years ago, two decades. What is that in the life of a country? Just two decades ago, Chinas per capita income was smaller than Indias. So just 20 years ago in per capita income terms we were a larger and a more prosperous country.

But look at where we are today. China is not one, it is not even two, it is not even three, it is actually four times India's size and Ill repeat that because its an absolutely stunning statistic, China is four times Indias size in GDP terms, they have a GDP of USD 5 trillion and we have a GDP of about USD 1.25 trillion.

So here is a country which in 20 years not only has left us behind but made us a quarter of their size. In per capita income terms while we were larger just 20 years ago, we are today I think one-fourth. So a very legitimate question needs to be asked in this country and needs to be asked from people who manage our economy and I just dont mean politicians, I mean everybody who is a part, who has a stake in managing this economy. Why did this happen?

And I think the people of India very legitimately need to ask this question that why is it that we have been in a relative sense impoverished by a neighbour who has grown so dramatically. What is it that they have done so right and what is it perhaps that we havent done that we are now one-fourth their size. This is not about political one-upmanship. This is just about a very strong political economy question. Why is it that we are so far behind?

So its a question which has always fascinated me as an entrepreneur and as a business journalist. So I said this is a good enough theme to dig one's teeth into and let's see if we can come up with something here.

In a very simplistic sense and either by design or unwittingly, China in a sense seemed to pick up some of the most effective economic policies of the two miracle economies which preceded China. I use the word effective, I do not use the word efficient. There is a vital difference in economic terms between those two words.

Effective, they have picked up from the Soviet Union. Remember the Soviet Union in the 70s was being thought of as an economy which would overtake America by 1990. Similarly remember that in the 1980s Japan was an economy which was targeted to overtake America. I think the year was 1998 when they were supposed to have overtaken America. Very similar things are being said about China today that it is set to overtake America in 2030, which is the date that a lot of people talk about.

So what China picked up from the Soviet Union was frankly the ability to extract massive surpluses and accumulate them in the hands of the state. China extracted major surpluses from its land by virtue of the fact that land in China belongs to the state and the peasant is a mere tenant. They were able to take land away rather cheap from the tenant and then sell it at a high price and create a surplus for the state, which is something of course in India is impossible to do and mercifully it is impossible to do.

They also extracted massive surpluses from their workers by keeping wages in that economy extremely low. They then extracted massive surpluses from their consumers and their trading partners by keeping their currency extremely low.

Then they created even more surpluses in the hands of their state by keeping the price of money, particularly money lent to the state corporations in China by keeping the price of money very low. It is 3% or 4% often when state corporations can borrow from state banks. So they kept the price of money very low and they kept the price of infrastructure services and they kept the price of industrial inputs very low. So all of these things created massive surpluses in the hands of the Chinese state.

The trick they learnt from Japan was, and I use trick in a positive sense. What they picked up from Japan was unlike the Soviet Union which did all of this but then whirled itself out from the western world, China did exactly the reverse. It actually engaged very dramatically with the western world, opened the flood gates to foreign direct investment and actually welcomed not only a cascade of dollars, but welcomed technology and welcomed management practices from the west, particularly America.

That created a huge amount of foreign equity in the economy along with a technological base particularly in the coastal areas. So it was a very dramatic alignment of economic policies which China put into place which led to this accumulation of massive surpluses in the hands of its state.

What they did with those surpluses actually is even more dramatic. One thing they did was to invest very massively in their economy. China today - and this is a stunning statistic - is investing 50% of its GDP. No other country at no other time in the history of this world has invested capital on this scale, 50% of the GDP is being invested. And within that 50%, they are putting very large sums of money into infrastructure. And within infrastructure, they are putting very large sums of money into social infrastructure which is education, health, farm productivity, rural investment, technology.

Earlier in the world it was thought that infrastructure and capital investment should happen along with economic growth. But China since it wanted to do this in 20 years rather than wait like the west to develop over 50 or 60 or 70 years, actually took that bet and invested well ahead of the curve, so that the rest of the economy and consumption has played catch up with Chinas investment.

In the book I have tried to talk about this as a new escape velocity model of capital investing which perhaps raises the whole threshold and something that India must examine very carefully why and the book deals with why are we so reticent about investing in our economy. We have constraints but there are opportunities as well.

The other thing that China did with that surplus was again a master stroke, something they borrowed if not consciously but unconsciously from Japan again, where they actually lent large amounts of those surpluses back to America. Today between Japan and China, I think they hold nearly USD 900 billion to USD 1 trillion of US Treasuries apiece. China is slightly more than Japan.

But they lent this money back to the US, US interest rates were low, it has refueled US consumption, it came right back into Chinese factories, China exported again created further surpluses, lent it back to the US, invested in their economy. So it was a very virtuous cycle between the world economy and China, which created these massive surpluses.

This virtuous cycle actually continued till three years ago until the US consumption cycle got pricked and the US asset bubble got pricked. So it is a rudimentary thing what I am trying to say. But that in a sense was the underpinning of Chinas dramatic economic expansion.

This led to major imbalances. No one is saying that this has been an easy ride for China and today they are grappling with major imbalances in their economy; whether it is imbalance between investment and consumption, whether it is imbalance in the environment side of the economy, whether its the fact that they could be looking at massive bad debts on the books of their banks.

So there are massive imbalances that they have had to deal with. But that is the challenge today for China and how to deal with those imbalances. But you cannot deny the fact that they have taken and pulled more people out of poverty than at any other time in the history of this world in such a short period of time.

What India needs to do and what India is doing or not doing, I think the audience knows well. So I wont dwell too much on that. I think the lessons for India are very clear. We should be investing in infrastructure far ahead of the curve and we should be far more bold in taking entrepreneurial policy risks.

If Mr Kamal Nath talks about 20 km a day then that is a great ambition. But metaphorically speaking, 20 km should be 40 km a day once he crosses 20 km because the absorptive capacity of this economy has to go up. Otherwise you will not have a structural inflation of 10% if the absorptive capacity of this economy is not going to go up you will have all those problems.

So I think what India needs to do fix its public finances, invest in infrastructure, become far more welcoming of private capital investment, far more welcoming of foreign capital investment, shed its incrementalism to economic growth and get the state to focus. The state just focusses on 3 or 4 areas like education, health, and agriculture. These are the three colossally neglected sectors of our economy. If the state just focuses on these and lets the well regulated private sector take off every other sector, a lot of the problems of this economy can be solved.

So the book looks at all these issues, does a lot of anecdotal mix and match, does a lot of point to point comparison between what the two countries have done. I would be delighted to receive your feedback and your constructive criticism of what one has written right or written wrong.

In the end, the book makes one conclusion and says that actually the question that was asked in the beginning is perhaps a bit incorrect. Actually this is not a race that one country will win. This is actually a race that one country will lose. If China does not repair its politics and does not today handle the imbalances and the destabilization that is threatening China then they are in real danger of losing this race even if they maybe four times India's size today.

India has to put much more energy into getting its public policies put out there and implement it with much more vigour, with much more risk taking by the state. The Indian state tends to think very incrementally. It probably now needs to think in terms of quantum changes.

Very often these arguments that are put out by people like me are thought of as elitist arguments. They are not. When you talk about quantum changes, you are talking about quantum changes in let's get a good fair Land Acquisition Act in. There is nothing elitist about it. Can we get and build more power for our people, more power plants? There is nothing elitist about that as well. Can we build more roads? There is nothing elitist about that. Can we have more education and health for our people? There is nothing elitist about that.

So this is not about getting an elitist argument about government versus private sector. This is not about that. This is about getting the Indian state far more energized into talking much quicker policy actions.

I just want to leave with one last thought for a lot of people who said that this race is over. Some very respected commentators, whom I admire very much have said that if there ever was a race, this is not the time. This is over because now China has gone irretrievably ahead.

I just want to remind people who have those convictions and as I said they are very respected people that if you look at it in terms of time, it is only 10 years. Just rewind to 1999-2000. Chinas economy was as big as Indias economy is today and institutionally much weaker than India's economy is today. India is a much stronger institutional economy, if you suspend disbelief and compare China of 2000 with India of 2010.

So you can say we are 25% and way behind China. But you can postulate the same hypotheses and say we are just 10 years behind China. To me someone whose first calling is that of an entrepreneur, that is really the way the hypothesis should be postulated in this country. That is really the way the debate should be run in this country. We are just 10 years behind China, we are just 10 years behind the country which we were ahead of 20 years ago.

So if we put the requisite amount of policy energy and take requisite amount of policy risks, our state has to learn to take risks, it doesnt take risks, it must learn to do that as the Chinese state has done and several other states in the world have done, then I have no reason to believe that this gap is unbridgeable. It can be bridged.

So please do, if you can, read the book. I would be delighted to receive your feedback and your constructive criticism so that this piece of work can be improved.

On next page: Panel discussion - Can India's tortoise make up lost ground on China's hare?

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